What Ruined The Banks

There's lots of confused talk these days
about how securitization helped cause our finanical crisis. In
the "just so story" version of the credit crisis the banks
securitized mortgage loans, knowing they could sell them off and
avoid any real risk. In reality, however, the banks didn't sell
off the mortgage backed securities. They held them, believing
that they would seriously appreciate.

Financial firms bought, held and insured large quantities of
risky, mortgage-related assets on borrowed money. The irony is
that these financial giants had little need to hold these
securities; they were already making enormous profits simply from
creating, bundling and selling them. "During dot-com IPOs of
the early 1990s, the firms that underwrote the stock offerings
did not hold on to those stocks," Siegel says. "They flipped
them. But in the case of mortgage-backed securities, the
financial firms decided these were good assets to hold. That was
their fatal flaw."

Explaining his theory further, Siegel pointed out that many
troubled banks and insurers continued to prosper in almost every
other aspect of their businesses right up to the 2008 meltdown.
The exception was the billions of dollars in mortgage-backed
securities that they bought and held on to or insured even after
U.S. home prices went into a free-fall more than two years ago.

Perhaps the most troubling aspect of all this is that its clear
that banks and regulators continue to hold on to exactly the same
idea: these assets will appreciate, housing will go up, if we
just hold them we'll make money. The fact that this was the road
to ruin apparently doesn't cause any hesitancy to march down it
all over again.